Evaluation of Dell's strategy

Q 1). Evaluate Dell's strategy over the period of the case, paying particular attention to sources of competitive advantage, Strategic Development and performance.

Dell is a customer-centric company with Michael Dell as its Chairman and CEO. Its marketing strategy is quite simple and basic in nature. The main emphasis is on the low-cost-strategy, i.e. selling the products at lower prices by following a ‘direct business model' which removes the middlemen, i.e. dealers, distributors, agents, etc. which add-on to the time and cost and offer high level of customer service, by meeting the customer's expectations. This direct business model has five features:

i. Maintaining direct relationship with the customers with no intermediaries to add confusion and cost.

ii. Taking into account that technology can be complex, so it focuses on working to keep things simple for customers.

iv. Focus on low-cost strategy; systems are such, that, all the activities related to production, supplies, inventory management, delivery are carried in a way to save time and cost to produce maximum efficiency.

v. Sales performance is maintained up to the maximum level to save costs and make maximum possible profits through a variety of products and services.

If a company wants to overcome its competitors, it has to gain competitive advantage over them, this can be done either by improving on the lines what others are doing, or by coming out with a completely new idea that proves to be successful. Implementation of an e-commerce plan in order to cut costs or improve sales may provide a business with a competitive advantage over others, or an alteration to the existing model of business, might lead to possibilities of gaining early competitive advantage.

According to Dena Waggoner (Encyclopaedia of Management) “The strongest competitive advantage is a strategy that cannot be imitated by other companies. Competitive Advantage can also be viewed as any activity that creates superior value above its rivals.”

Dell is considered to be the market leader in online commercial sales. The best utilisation of Internet-related services for the business such as, procurement, customer support, sales, and relationship management gives Dell a competitive advantage over its competitors. The customers have an easy access to www.dell.com where they can review, configure, and order systems according to their choice and also, track orders from the stage of manufacturing to delivery to their door-steps. Through this automated process, Dell has gained the advantage of growing sales without increasing its staff. Cost savings of phone, commissions to agents, etc. can also be seen. Also, this online Web-based PC purchasing process enables them to keep inventory at minimum level.

According to Micheal E. Porter (1979), any company competing in an industry must develop at least one analysis of its five forces for the industry. This competitive analysis gives a company an advantage of making better strategies. The porter's model focuses on the following five segments which should be analysed as:

· Threat of new entrants.

· Bargaining power of suppliers.

· Bargaining power of buyers.

· Threat of substitutes.

· Competitive Rivalry

As far as a company like DELL is concerned, the competitive analysis of the five forces of the industry where the company should focus on are:

* Threat of new entrants: In case of Dell, this is not extreme. The analysis reveals that, the initial investment that should be done by new businesses is low. There would be low differentiation, but, still a reputable brand name would be a barrier for entry for them. It can also be seen, that Dell is suffering from decreasing profitability and no legal or governmental barriers for new entrants from sometime, but it not due the other big competitors like HP, Lenovo, etc. Rather, it is from the independent business, but since, the reason, this competition is not so intense, this can be tolerable.

* Bargaining power of Suppliers: This has been given a high priority as, there are a large number of suppliers for hardware products, but, inspite of this fact, there is a monopoly for inputs, i.e. ‘Microsoft' and ‘Intel' standards for all PC's and laptops; Also, the switching costs in this case would be very high.

* Bargaining power of Buyer: This also has a high priority as; the customers are highly price sensitive. They expect quality customer service and reliability of products. Dell has been providing reliable products and best quality customer service since its anticipation. But, it has to be noted, the fundamentals of the company were based on a low-price strategy, i.e., if the prices rise, there are high probabilities of customers to switch towards other brands.

* Threat of Substitutes: This should pose a low priority to Dell because of the reason, there is a strong presence of PC's and laptops in the market. A recent survey report showed, that, there is a computer for every three people in the U.S.

* Competitive Rivalry: This holds a very strong importance. The competition among competing IT companies is very intense. There is an ever-growing price war among organisations because of which, the margin of profitability decreases, also, there is low differentiation in products. But, inspite of the severe competition, Dell still holds a greater part of the market share; this means that the company's strategies of low-pricing were successful in capturing the market.

As per the case study, Apart from providing hardware and software solutions for computers and laptops, Dell has moved into new businesses of producing-

* Servers for important business applications like e-mails, database, etc.

To capture international markets, Dell manufactures its products in six locations of the world to ensure faster delivery of its products to the customer. The various locations for production include:

* Austin, Texas

* Nashville, Tenn

* Eldorado do Sul, Brazil (America)

* Limerick, Ireland (Europe, Middle-east and Africa)

* Penang, Malaysia (Asia Pacific and Japan)

* Xiamen, China (China)

The company operates through its subsidiaries in Australia, India, China, Taiwan, Korea, Hong-Kong, New Zealand, Malaysia, Singapore and Thailand being headquartered in Japan and Singapore.

Also, it has been headquartered in United Kingdom and operates with subsidiaries in UAE, Poland, Sweden, Spain, South Africa, Denmark, Finland, Norway, The Netherlands, Ireland, Italy, Greece, Germany, France, Belgium, Czech Republic, Austria and Switzerland.

So, we can see it is a company with global presence. The sales performance of Dell in the year 2002 can be seen as follows-

* The company increased its world market share from 13.5% initially in the year 2001 to 16% in the third quarter of 2002.

* It increased its market share in Europe from 9.7% initially in 2001 to 10.5% in 2002.

* Sales of external storage systems increased by 73% worldwide.

* In the Unites States, sales of precision workstations increased by 37% and by 27% world-wide.

* Combined Dell shipments to Europe, Middle East and Africa (EMEA) increased 13% without which the industry was at just 5%.

So, we can conclude that, Dell is a highly performing company and its strategy of low-pricing has proved fruitful to it.

Q2. What strategic alliances has Dell formed and in what way do these assist and complement Dell's growth and development?

A strategic alliance is a mutual relationship between two or more companies in order to meet desired and agreed goals and objectives. In such a case, both the companies are independent and are mutually benefited.

Initially, business did not require any external business relationships as they were self-sufficient. But, over the years, ways and means to carry out a business has changed due to a change in customer requirements. Even the biggest corporations of the world such as Microsoft cannot exist without relationships; if they didn't had any relationships with companies which manufacture CD's or DVD's they could not sell any of their products

The similar story is with Dell and it has formed alliances with EMC Corporation, AMD and Microsoft over the period of time and it has benefited Dell a lot in terms of profitability and meeting customer needs.

v EMC Corporation is the world leader in the business of information management and storage solutions (EMC, 2010, About EMC). Dell and EMC Corporation collaborated in the year 2001 to develop storage systems for business and home computers on a five year contract. Within this time period, more than 34,000 units of Dell/EMC branded systems had been sold world-wide to more than 10,000 customers. By 2005, Dell/EMC brand was the top-10 disk storage system vendor in the world. Thus, in September 2006, the deal was extended to another 6 years time -period. Since then, this alliance of Dell has led to many successful products lines and innovations, some of them are-

v By the mid of 2006, Dell collaborated with AMD due to its increasing success in the customers. Prior to that, Dell only produced Intel based systems. Then AMD Opteron gave a very high performance than Intel Xeon in a computer system and also, they were cheaper than the Intel processors. The reason for Dell to collaborate with AMD was that it did not want to lose its potential customers by just staying with Intel. Also, associating with AMD has added a new product range for Dell. This alliance has been very fruitful to Dell in terms of sales and profits but, there has been one disadvantage that Dell is facing, i.e. since, they are not any exclusive computer by staying to one brand, they are not able to get exclusive deals on prices of the stock. But anyhow, as the strategy of Dell is to purchase huge number of stocks at low prices, the price becomes substantial.

v Microsoft is the biggest market share holder of the IT industry. Most of the home PC's run on Microsoft Windows operating systems. This is the reason, that Dell advertises and ships its PC's and laptops with the operating system from Microsoft. If Dell does not do it, there are probabilities, that it would lose its market share of home PC's and laptops. So, Dell is bound to maintain this association with Microsoft. They also, possess the option of shipping Red-Hat and SUSE versions of Linux with the system. But, they cannot advertise this as per their licensing contract with Microsoft.

Dell has been working with Microsoft to enhance responsiveness for customers on the Microsoft web solution platform. Its measurable enterprise initiative is acclamatory to Microsoft's Dynamic Systems Initiative (DSI) which has been objected to reduce costs and complications.

Thus, this relationship has been benefiting Dell in terms of both profits in the home based PC market as well as in improving customer experiences.

For a large company like Dell, the relationship with small firms can be altered in terms of generating profits and boosting technological upgradations. But, as far as the relationship with big companies like, EMC, AMD or Microsoft is concerned, Dell is bound to maintain it. In the future as well, is can be understood Dell will maintain a close relationship with Microsoft even if the market of Open source operating systems gains popularity.

Q3. Comment on the rationale behind HP/Compaq merger and consider likely impact on Dell's position in the future.

A merger is a situation of business when a business when a business unifies itself with another business and the control of the business is being shared among both the participating companies. It is different from Acquisitions where one business control over the other by buying it.

The two companies merged together in 2002, which were then followed by the acquisition of Compaq by HP in late 2003 for $18.5 million. This was done to capture the world-wide market share of the computers, printers, data-storage systems, etc. HP had to struggle a lot for the integration of the newly formed HPQ (HP and Compaq merger). By today, the merger has become fully successful and is now an example for studies on mergers. It is considered to be the biggest corporate information technology merger in the history. The annual sales of the combined new company are more than $90 billion and the operating income for the various operations is close to $4 billion. The main features of the new company are cost-cutting, and innovation. Thus, giving HP the unique prospects for becoming a market leader.

While assessing a merger, the business value of the businesses involved should be considered. As, for the reason, HP and Compaq have already formed a merger, the business value of the merger would be analysed under the following points:

v Net Assets Value: It is the total assets of the company minus total liabilities. Also, known as Owner's equity or Share-holder's equity or net worth of the company.

In case of Dell, the Net Assets Value for the given years can be derived as: 2002 2001

(in $ millions) (in $ millions)

Total assets 14, 712 13, 287

Total liabilities 10, 064 8,505

Net Assets Value 4648 4782

Thus, as the Net asset value of the business after taking off the debts on the business shows a good figure, that suggests that the merger was quite successful. But, as the figures suggest it was more profitable in 2001 than in 2002.

v Cash Flows: From the given balance sheet, considering appendix 1 and appendix 3, we can say, this merger was successful due to the following facts:

* The net revenue of the company until 2002 has been ever increasing that gives us a positive sign for its success.

* The operating income was more in 2001 and lesser in 2002 that suggests that the merger company was rigorously working to bring down operational costs. But since, difference of the figures was around $497 million, which suggests it was not in favour of the companies to merge. But, as the figures are concerned about the merger of the two companies, both in initial phase of merger; the figure seems to be substantial.

* The net income of the merged company after all expenses in 2002 was a decreased by $ 530 million, from the prior 2001 figures, which again suggests that the merger was not favourable. But, as HP was consistently working on the unification of the two companies, and the merger was in the initial stage which clearly suggests, they were ready to make a loss, and the amount of money that they lost was substantial as well.

v Price / Earnings per share Ratio (P/E ratio): It has increased over the period of the time since the starting from 1998 to 2002, and thus, suggests, it was attracting investors for the company.

But, it must be considered that, the merger was in its initial phase in 2002, and the company must have been working on improvement of operations, R & D, HR policies, etc. Due to which, the revenues were low as compared to previous years.

When comparing Dell and HP after the merger, there exists a difference in motives of the two companies. Dell has a unique strategy of selling made to order PC's and laptops according to customer requirements that too at lower prices. Whereas, HP considers a variety of products as an efficient sales tool that would meet customer expectations and requirements. But still, HP wins over Dell in terms of market share.

According to a survey of the U.S. Market, which accounted for 13% of company revenues; the majority of response of customers for not maintaining a relation with Dell was concerning Quality Issues. (www.Businessinsider.com)

In my view, Dell's price strategy is unique in its nature, but, besides that, Dell fails to meet the other customer requirements such as eminence of the product and technical support. Another cause of low sales of Dell products can be because of the internet and role of media in analysing Dell's products performance. People have become more reluctant to buy Dell's products because of the consumer review available on the internet about poor performing products, lack of technical support and delays in product delivery.

So, based on the above statements it can be stated that Dell is in a very critical situation and if the current situations prevail for long, the company will be doomed. But, Dell cannot leave the market open to be captured by HP and other competitors. In order to win back the loyalty of its customers in the near future the company would concentrate on resolving on the three main problems which its customers face due to problems in the company procedures. The three factors could be:

* Quality of products.

* Quality of Technical Support.

* Product delivery problems.

To regain the trust of the customers may be it would work upon winning back relations with media to spread the message of its resolved problems that the customers had been facing like Toyota has done recently for recalling the Toyota models with a problem in the accelerator pedal which lead to risk of lives.( http://www.toyota.co.uk/recall/). The chance of success depends on the way the whole initiative of winning back customer loyalty is being carried out.

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